“Buy American” (Again): New Executive Order Requires Changes (By 2020)

On July 15, 2019, President Trump signed an Executive Order requiring regulations implementing the Buy American Act, 41 U.S.C. §§ 8301-8305, to be changed. While President Trump has previously issued two other policy-based “Buy American” Executive Orders, this new Order directs that specific changes be made, reversing government policies that have been in place for 65 years. These changes have the potential to significantly disrupt many government contractors’ supply chains and internal compliance programs. As such, companies should start planning now for the final regulations that are expected sometime in 2020.

The Buy American Act (BAA)

Subject to multiple exceptions (some of which are discussed below), the BAA requires the government to purchase products “manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States.” 41 U.S.C. § 8302(a)(1). The Federal Acquisition Regulation (“FAR”) has interpreted this statutory requirement by requiring a “domestic end product” to meet a two part test: (i) the end product must be manufactured in the United States; and (ii) at least 50% of the cost of the components must also be of U.S. origin. FAR 25.003. This second part is commonly referred to as the “component test.” The 50% threshold for the “component test” dates back to the Eisenhower administration and a 1954 Executive Order (E.O. 10582), which interpreted the phrase “substantially all” to mean at least 50%. But, of course, the phrase is open to interpretation.

Summary of New Executive Order

The new Executive Order 13811, “Maximizing Use of American-Made Goods, Products, and Materials,” (the “Order”) interprets the statute differently. Unlike the two prior Trump Executive Orders (discussed here and here), which mainly made broad policy statements and asked government agencies to assess what they could do to improve efforts to “Buy American,” this new Order largely revokes the Eisenhower Executive Order and directs the FAR Council to change the regulations in at least two key ways:

1. The “Component Test.” The Order directs the thresholds under the “component test” to be increased, splitting out separate requirements for “iron and steel end products” and “all other end products.”

A few key points are worth highlighting about this new rubric:

• Components vs. Products. The terms used in the Order do not line up precisely with the definitions used in the FAR. The FAR speaks in terms of “components” and “cost of components” (FAR 25.003), while the Order speaks in terms of “products used in” an end product and the associated costs. These are not necessarily the same thing – a “component” is different from a subcomponent, and many U.S. manufacturers have been able to meet the BAA requirements by converting foreign-origin materials and subcomponents into a U.S. origin “component” by performing intermediate manufacturing steps in the U.S. The FAR Council may ultimately reconcile the various terms and apply the commonly understood “component” definition already in place. But, then again, maybe they won’t.
• Another Love Letter to Domestic Iron & Steel. The radical increase in the iron and steel threshold now puts the Buy American Act on par with the Buy America (no “n”) Act, 49 U.S.C. § 5323(j); 23 U.S.C. § 313, which requires iron and steel of completely U.S. origin on transportation, highway, and infrastructure projects. Why the difference? Well, remember that the BAA requires only that the iron or steel be “substantially all” of U.S. origin, leaving a little daylight for some foreign content. As has been seen with the President’s tariffs on steel and aluminum (discussed here), the President loves domestic metals. And, much like Spinal Tap, the President seems committed to “turning it up to 11.”
• Up, Up and Away? The Order asks the FAR Council to consider whether the thresholds should be raised even further, potentially as high as 75% for “other end products.” (As noted above, the 95% threshold for iron and steel is probably as high as it can get). The Order suggests that the threshold might be raised, even incrementally, “based on the feasibility and desirability” of any such changes. We can take some small comfort that changes greater than 55% won’t happen immediately; but industry will live under the specter of an increasingly tougher standard that might incrementally slide over the course of several years. Such a result would not lead to the regulatory predictability that industry prefers.

2. The “Evaluation Factor.” One of the most widely used exceptions to the BAA is when the domestic end product is unreasonably expensive compared to a foreign product. FAR 25.103(c); 25.202(a)(3). As such, the BAA does not – strictly speaking – require the government to “Buy American.” It merely encourages the government to “Buy American.” When comparing offers that propose delivering domestic and foreign end products, the FAR directs the government to apply an evaluation factor in favor of domestic end products, inflating (for price comparison purposes) the evaluated cost of the foreign product. The chart below summarizes the current and future evaluation factors:

The process by which these evaluation factors are applied is set forth in FAR Subpart 25.5. It is not simple, but (in a nutshell) it works something like this:

• Assume that the government calls for proposals for the delivery of 1,000 widgets; the RFP calls for a lowest price/technically acceptable procurement.
• Assume that Company A offers $100 per widget for a total proposed price of $100,000. These widgets were all manufactured in China.
• Assume that Company B offers $110 per widget for a total proposed price of $110,000. These widgets were all manufactured in the United States.
• Using the current evaluation factors (assuming Company B is a large business), Company A’s proposed price would be inflated by 6%. Company A’s evaluated price would be $106,000; Company B’s evaluated price would be $110,000. Company A, as the lowest evaluated price offeror, would receive the $100,000 award, notwithstanding the fact that Company A is delivering foreign-made products.
• Using the current evaluation factors (and assuming that Company B is a small business), then Company A’s proposed price would be inflated by 12%. Company A’s evaluated price would be $112,000; Company B’s evaluated price would be $110,000. Company B, as the lowest evaluated price offeror, would receive the $110,000 award, notwithstanding the fact that it’s actual proposed price was higher.
• Using the Order’s new evaluation factors, Company B would win in practically every scenario. In fact, Company B’s price could be as high as nearly $120-$130 per widget (compared to the foreign alternatives priced at $100), and Company B could still be considered the lowest price offer. What this means practically is that foreign-made products will now need to be significantly cheaper than the domestic alternatives in order for the government to be able to buy under the BAA.

3. “To The Maximum Lawful Extent.” The Order encourages the FAR Council to update the BAA regulations “to most effectively carry out the goals of the Buy American Act and [the] Administration’s policy of enforcing the Buy American Act to its maximum lawful extent.” It also calls for government agencies to make recommendations by January 2020 for other ways that the regulations may be changed. One area that the FAR Council is directed to look into (as discussed above) is incremental increases to the costs of components under the “component test.” But other issues may also be considered by the FAR Council, even though they are not expressly spelled out in the Order. For example:

• Will the exception to the “component test” for commercial off-the-shelf (“COTS”) products continue? Currently, COTS products need only meet the first prong of the BAA – the end product must be manufactured in the United States. FAR 25.100(a)(3). 41 U.S.C. § 1907 authorizes the FAR Council to streamline federal procurements, determining that certain normal requirements will not apply to purchases of COTS products. Back in 2009, the FAR Council exempted COTS products from the “component test. But who’s to say that the policy winds haven’t shifted? The FAR Council could easily reverse the 2009 decision, which would impose a massive (and unwelcome) regulatory burden on COTS vendors.
• Will the exception for commercial information technology continue? Currently, the government can purchase “information technology” (a broad term defined under FAR 2.101) that is a “commercial item” (another broad term) without regard to the BAA. FAR 25.103(e) and 25.202(a)(4). This is a statutory requirement (Section 535, Pub. L. No. 108-199), so the FAR Council may have less latitude in limiting this exception. Nonetheless, where the commercial IT exception allows the government to buy massive amounts of foreign-made products, and where the Order’s priorities are clear, the FAR Council may narrow the scope of this commonly used exception.
• Will the processes be tightened for obtaining “public interest” or “nonavailability” waivers? The FAR sets forth the process by which these two types of exceptions can be invoked. FAR 25.103(a) and (b); 25.202(a)(1) and (2). The process is already: (i) involved; (ii) invoked at high levels; and (iii) subject to extra scrutiny. The FAR Council could easily add other hurdles to these processes, requiring more public notice and more public comment, all of which tamp down on a contracting officer’s willingness to purchase products that are not domestically manufactured. Moreover, the FAR Council could also require agencies to reassess previously issued nonavailability determinations, applying the new standards. While unlikely, this could introduce a whole new level of confusion and uncertainty that industry would prefer to avoid.
• Will the BAA be applied below the micro-purchase threshold? Currently, the BAA does not apply to micro-purchases – individual purchases by the government valued at $10,000 or less. FAR 25.100(b). But what if the FAR Council determines it is necessary to cover these kinds of micro-purchases? While this too seems unlikely, the Order makes clear that everything is on the table.
• Will the FAR Council define the term “manufactured” to require increased manufacturing in the U.S.? The BAA requires items to be “manufactured,” which is not a defined term in the FAR. Case law has interpreted this term to require some sort of a mechanical operation on an end product whereby the identity and character of the end item is established and fixed as to its current and future use. A&D Mach. Co., B-242546, May 16, 1991, 91-1 CPD ¶ 473; Marbex, Inc., B-225799, May 4, 1987, 87-1 CPD ¶ 468. While the “assembly of components necessary to transform an imported machine into a machine which meets the specifications can constitute manufacture” (General Kinetics, Inc., B-242052.2, May 7, 1991, 91-1 CPD ¶ 445), processes such as refurbishing, packaging, and testing do not generally rise to the level of domestic “manufacture.” TRS Research, B-285514, Aug. 7, 2000, 2000 CPD ¶ 128. This legal test for “manufacturing” is considered a relatively modest threshold. The FAR Council might choose to expressly define “manufactured” for the first time, setting a higher standard than currently exists. Such an action would, of course, upset more than 85 years of settled law and would (to say the least) upset nearly every contractor that has to comply with BAA on a regular basis.

Timeline for Changes

The Order instructs the FAR Council to issue a proposed rule for public comment within 180 days, which corresponds roughly with January 11, 2020. Once public comments have been received and evaluated, the FAR Council is required to “promptly” issue a final rule.

Those familiar with the rulemaking process may scoff at the idea that anything can (or even will) happen “promptly.” Nonetheless, this timeline seems to indicate that new, final rules may be in effect as early as Spring 2020. And, of course, this timeline could be accelerated even further if the FAR Council decides to issue an interim rule instead of a proposed rule. Such an interim step is unlikely, to be sure, but the language of the Order does not expressly rule this out.

Conclusion

It goes without saying that contractors are well-advised to continue closely monitoring country of origin requirements in their contracts, and ensuring that the products purchased through the supply chain match the contract requirements. With regard to the pending changes to the BAA:

• Companies can start by identifying their contracts that include the Buy American Act, as opposed to contracts that include the Trade Agreements Act (“TAA”), FAR 52.225-5. While these clauses are often lumped together by some companies in their compliance programs, the two statutes impose distinct compliance obligations. But the Order affects only the BAA – not TAA. So if your contract is not subject to the BAA, then you probably have less to worry about.
• Manufacturers can start by looking at their supply chain, assessing whether there are any end products that are “close” under the new component threshold (in the 50-55% domestic content range) and that may need to be adjusted to ensure compliance in 2020.
• Manufacturers may also begin considering whether there are changes to their manufacturing processes, where they can bring more manufacturing into the U.S. in order to better meet the various legal requirements. (But remember… even though NAFTA or the U.S.-Mexico-Canada Agreement may or may not be in place next month, these free trade agreements do not apply to the Buy American Act unless the contracts exceed certain dollar thresholds set by the U.S. Trade Representative. FAR 25.402).
• Resellers can start by reviewing their list of suppliers and products, identifying potentially problematic products that may qualify under the BAA today, but may not qualify under the new rules. If a product is a “close call,” it simply might not be worth the potential risk of selling to the government in an era where “Buy American” is something that everyone is watching more closely.

Hopefully, whatever rules are ultimately proposed will follow the Order as closely as possible, will hew to the existing rubrics and definitions currently used in FAR Part 25, and will limit the erosion of other exceptions (many of which industry has come to rely on). Hopefully, the public comments will be heard and implemented in an even-handed manner. While we all support the idea of “Buy American,” the simple fact is that in this modern, international economy, every product has something in it that is foreign. Forcing the government to pay astronomical prices for commercially available products simply makes no sense; let’s hope that a little balance can be measured throughout the “Buy American” rally cry.